10-1
PREVIEW OF CHAPTER
10
Intermediate Accounting
IFRS 2nd Edition
Kieso, Weygandt, and Warfield
10-2
10
Acquisition and Disposition of
Property, Plant, and
Equipment
LEARNING OBJECTIVES
After studying this chapter, you should be able to:
1. Describe property, plant, and
equipment.
5. Understand accounting issues related
to acquiring and valuing plant assets.
2. Identify the costs to include in initial
valuation of property, plant, and
equipment.
6. Describe the accounting treatment for
costs subsequent to acquisition.
3. Describe the accounting problems
associated with self-constructed assets.
4. Describe the accounting problems
associated with interest capitalization.
10-3
7. Describe the accounting treatment for
the disposal of property, plant, and
equipment.
PROPERTY, PLANT, AND EQUIPMENT
Property, plant, and equipment are assets of a durable nature.
Other terms commonly used are plant assets and fixed assets.
► “Used in operations” and not for
resale.
► Long-term in nature and usually
depreciated.
► Possess physical substance.
10-4
Includes:
 Land,
 Building structures
(offices, factories,
warehouses), and
 Equipment
(machinery, furniture,
tools).
LO 1
10
Acquisition and Disposition of
Property, Plant, and
Equipment
LEARNING OBJECTIVES
After studying this chapter, you should be able to:
1. Describe property, plant, and
equipment.
5. Understand accounting issues related
to acquiring and valuing plant assets.
2. Identify the costs to include in initial
valuation of property, plant, and
equipment.
6. Describe the accounting treatment for
costs subsequent to acquisition.
3. Describe the accounting problems
associated with self-constructed assets.
4. Describe the accounting problems
associated with interest capitalization.
10-5
7. Describe the accounting treatment for
the disposal of property, plant, and
equipment.
ACQUISITION OF PROPERTY, PLANT,
AND EQUIPMENT (PP&E)
Historical cost measures the cash or cash equivalent price of
obtaining the asset and bringing it to the location and condition
necessary for its intended use.
In general, costs include:
1. Purchase price, including import duties and non-refundable
purchase taxes, less trade discounts and rebates.
2. Costs attributable to bringing the asset to the location and
condition necessary for it to be used in a manner intended
by the company.
10-6
LO 2
ACQUISITION OF PROPERTY, PLANT,
AND EQUIPMENT (PP&E)
Companies value property, plant, and equipment in
subsequent periods using either the
10-7

cost method or

fair value (revaluation) method.
LO 2
ACQUISITION OF PP&E
Cost of Land
All expenditures made to acquire land and ready it for use.
Costs typically include:
(1) purchase price;
(2) closing costs, such as title to the land, attorney’s fees, and
recording fees;
(3) costs of grading, filling, draining, and clearing;
(4) assumption of any liens, mortgages, or encumbrances on
the property; and
(5) additional land improvements that have an indefinite life.
10-8
LO 2
ACQUISITION OF PP&E
Cost of Land

Improvements with limited lives, such as private
driveways, walks, fences, and parking lots, are recorded
as Land Improvements and depreciated.

Land acquired and held for speculation is classified as
an investment.

Land held by a real estate concern for resale should be
classified as inventory.
10-9
LO 2
ACQUISITION OF PP&E
Cost of Buildings
Includes all expenditures related directly to acquisition or
construction. Costs include:

materials, labor, and overhead costs incurred during
construction and

professional fees and building permits.
Companies consider all costs incurred, from excavation to
completion, as part of the building costs.
10-10
LO 2
ACQUISITION OF PP&E
Cost of Equipment
Include all expenditures incurred in acquiring the equipment
and preparing it for use. Costs include:
10-11

purchase price,

freight and handling charges,

insurance on the equipment while in transit,

cost of special foundations if required,

assembling and installation costs, and

costs of conducting trial runs.
LO 2
ACQUISITION OF PP&E
Illustration: The expenditures and receipts below are related to land,
land improvements, and buildings acquired for use in a business
enterprise. Determine how the following should be classified:
a. Money borrowed to pay building contractor
(signed a note)
a. Notes Payable
b. Payment for construction from note proceeds
b. Buildings
c.
c.
Cost of land fill and clearing
Land
d. Delinquent real estate taxes on property
assumed by purchaser
d. Land
e. Premium on 6-month insurance policy during
construction
e. Buildings
10-12
LO 2
ACQUISITION OF PP&E
Illustration: Determine how the following should be classified:
f.
Refund of 1-month insurance premium
because construction completed early
f.
(Buildings)
g. Architect’s fee on building
g. Buildings
h. Cost of real estate purchased as a plant site
(land €200,000 and building €50,000)
h. Land
i.
Commission fee paid to real estate agency
i.
Land
j.
Cost of razing and removing building
j.
Land
k.
Installation of fences around property
k.
Land
Improvements
10-13
LO 2
ACQUISITION OF PP&E
Illustration: Determine how the following should be classified:
l.
Proceeds from residual value of demolished
building
m. Interest paid during construction on money
borrowed for construction
n. Cost of parking lots and driveways
o. Cost of trees and shrubbery planted
(permanent in nature)
p. Excavation costs for new building
10-14
l.
(Land)
m. Buildings
n. Land
Improvements
o. Land
p. Buildings
LO 2
10
Acquisition and Disposition of
Property, Plant, and
Equipment
LEARNING OBJECTIVES
After studying this chapter, you should be able to:
1. Describe property, plant, and
equipment.
5. Understand accounting issues related
to acquiring and valuing plant assets.
2. Identify the costs to include in initial
valuation of property, plant, and
equipment.
6. Describe the accounting treatment for
costs subsequent to acquisition.
3. Describe the accounting problems
associated with self-constructed
assets.
4. Describe the accounting problems
associated with interest capitalization.
10-15
7. Describe the accounting treatment for
the disposal of property, plant, and
equipment.
ACQUISITION OF PP&E
Self-Constructed Assets
Costs include:

Materials and direct labor

Overhead can be handled in two ways:
1. Assign no fixed overhead.
2. Assign a portion of all overhead to the construction
process.
Companies use the second method extensively.
10-16
LO 3
10
Acquisition and Disposition of
Property, Plant, and
Equipment
LEARNING OBJECTIVES
After studying this chapter, you should be able to:
1. Describe property, plant, and
equipment.
5. Understand accounting issues related
to acquiring and valuing plant assets.
2. Identify the costs to include in initial
valuation of property, plant, and
equipment.
6. Describe the accounting treatment for
costs subsequent to acquisition.
3. Describe the accounting problems
associated with self-constructed assets.
4. Describe the accounting problems
associated with interest
capitalization.
10-17
7. Describe the accounting treatment for
the disposal of property, plant, and
equipment.
ACQUISITION OF PP&E
Interest Costs During Construction
Three approaches have been suggested to account for the
interest incurred in financing the construction.
$0
Capitalize no
interest during
construction
ILLUSTRATION 10-1
Capitalization of Interest
Costs
10-18
Increase to Cost of Asset
Capitalize actual
costs incurred during
construction
$?
Capitalize
all costs of
funds
IFRS
LO 4
ACQUISITION OF PP&E
Interest Costs During Construction

IFRS requires — capitalizing actual interest (with
modification).

Consistent with historical cost.

Capitalization considers three items:
1. Qualifying assets.
2. Capitalization period.
3. Amount to capitalize.
10-19
LO 4
Interest Costs During Construction
Qualifying Assets
Require a substantial period of time to get them ready for
their intended use or sale.
Two types of assets:
10-20

Assets under construction for a company’s own use.

Assets intended for sale or lease that are constructed or
produced as discrete projects.
LO 4
Interest Costs During Construction
Capitalization Period
Begins when:
1. Expenditures for the assets are being incurred.
2. Activities for readying the asset for use or sale
are in progress .
3. Interest costs are being incurred.
Ends when:
The asset is substantially complete and ready for use.
10-21
LO 4
Interest Costs During Construction
Amount to Capitalize
Capitalize the lesser of:
1. Actual interest cost incurred.
2. Avoidable interest - the amount of interest cost during
the period that a company could theoretically avoid if it
had not made expenditures for the asset.
10-22
LO 4
Interest Costs During Construction
Illustration: Assume a company borrowed $200,000 at 12% interest
from State Bank on Jan. 1, 2015, for specific purposes of constructing
special-purpose equipment to be used in its operations. Construction on
the equipment began on Jan. 1, 2015, and the following expenditures
were made prior to the project’s completion on Dec. 31, 2015:
Actual Expenditures during 2015:
January 1
100,000
April 30
150,000
November 1
300,000
December 31
100,000
Total expenditures
10-23
$
$
650,000
Other general debt existing on
Jan. 1, 2015:
$500,000, 14%, 10-year
bonds payable
$300,000, 10%, 5-year
note payable
LO 4
Interest Costs During Construction
Step 1 - Determine which assets qualify for capitalization of
interest.
Special purpose equipment qualifies because it requires a period of
time to get ready and it will be used in the company’s operations.
Step 2 - Determine the capitalization period.
The capitalization period is from Jan. 1, 2015 through Dec. 31, 2015,
because expenditures are being made and interest costs are being
incurred during this period while construction is taking place.
10-24
LO 4
Interest Costs During Construction
Step 3 - Compute weighted-average accumulated expenditures.
Date
Jan. 1
Apr. 30
Nov. 1
Dec. 31
Weighted
Average
Actual
Capitalization Accumulated
Expenditures
Period
Expenditures
$ 100,000
12/12
$ 100,000
150,000
8/12
100,000
300,000
2/12
50,000
100,000
0/12
$ 650,000
$ 250,000
A company weights the construction expenditures by the amount of time
(fraction of a year or accounting period) that it can incur interest cost on the
expenditure.
10-25
LO 4
Interest Costs During Construction
Step 4 - Compute the Actual and Avoidable Interest.
Selecting Appropriate Interest Rate:
10-26
1.
For the portion of weighted-average accumulated expenditures
that is less than or equal to any amounts borrowed specifically to
finance construction of the assets, use the interest rate incurred
on the specific borrowings.
2.
For the portion of weighted-average accumulated expenditures
that is greater than any debt incurred specifically to finance
construction of the assets, use a weighted average of interest
rates incurred on all other outstanding debt during the period.
LO 4
Interest Costs During Construction
Step 4 - Compute the Actual and Avoidable Interest.
Actual Interest
Specific Debt
$
Debt
200,000
$
500,000
300,000
1,000,000
General Debt
Avoidable Interest
10-27
Interest
Rate
12%
Actual
Interest
$
24,000
14%
10%
$
70,000
30,000
124,000
Accumulated
Expenditures
$ 200,000
50,000
$ 250,000
Interest
Rate
12%
12.5%
Weighted-average
interest rate on
general debt
$100,000
$800,000
= 12.5%
Avoidable
Interest
$
24,000
6,250
$
30,250
LO 4
Interest Costs During Construction
Step 5 – Capitalize the lesser of Avoidable interest or Actual
interest.
Avoidable interest
Actual interest
$
30,250
124,000
Journal entry to Capitalize Interest:
Equipment
Interest Expense
10-28
30,250
30,250
LO 4
Interest Costs During Construction
Comprehensive Illustration: On November 1, 2014, Shalla
Company contracted Pfeifer Construction Co. to construct a building
for $1,400,000 on land costing $100,000 (purchased from the
contractor and included in the first payment). Shalla made the
following payments to the construction company during 2015.
10-29
LO 4
Interest Costs During Construction
Pfeifer Construction completed the building, ready for occupancy, on
December 31, 2015. Shalla had the following debt outstanding at
December 31, 2015.
Specific Construction Debt
1. 15%, 3-year note to finance purchase of land and
construction of the building, dated December 31, 2014, with
interest payable annually on December 31
Other Debt
2. 10%, 5-year note payable, dated December 31, 2011, with
interest payable annually on December 31
3. 12%, 10-year bonds issued December 31, 2010, with
interest payable annually on December 31
$750,000
$550,000
$600,000
Compute weighted-average accumulated expenditures for 2015.
10-30
LO 4
Interest Costs During Construction
Compute weighted-average accumulated expenditures for 2015.
ILLUSTRATION 10-4
Computation of Weighted-Average
Accumulated Expenditures
10-31
LO 4
Interest Costs During Construction
Compute the avoidable interest.
10-32
ILLUSTRATION 10-5
Computation of
Avoidable Interest
LO 4
Interest Costs During Construction
Compute the actual interest cost, which represents the maximum
amount of interest that it may capitalize during 2015.
ILLUSTRATION 10-6
Computation of Actual
Interest Cost
10-33
The interest cost that Shalla capitalizes is the
lesser of $120,228 (avoidable interest) and
$239,500 (actual interest), or $120,228.
LO 4
Interest Costs During Construction
Shalla records the following journal entries during 2015:
January 1
March 1
May 1
December 31
10-34
Land
Buildings (or CIP)
Cash
100,000
110,000
Buildings
Cash
300,000
Buildings
Cash
540,000
Buildings
Cash
Buildings (Capitalized Interest)
Interest Expense
Cash
450,000
210,000
300,000
540,000
450,000
120,228
119,272
239,500
LO 4
Interest Costs During Construction
At December 31, 2015, Shalla discloses the amount of interest
capitalized either as part of the income statement or in the notes
accompanying the financial statements.
ILLUSTRATION 10-7
Capitalized Interest
Reported in the Income
Statement
ILLUSTRATION 10-8
Capitalized Interest
Disclosed in a Note
10-35
LO 4
Interest Costs During Construction
Special Issues Related to Interest Capitalization
1. Expenditures for Land

If land is purchased as a site for a structure, interest
costs capitalized during the period of construction are
part of the cost of the plant, not the land.

Conversely, if the company develops land for lot sales,
it includes any capitalized interest cost as part of the
acquisition cost of the developed land.
2. Interest Revenue

10-36
In general, companies should not offset interest revenue
against interest cost unless earned on specific borrowings.
LO 4
WHAT ‘S IN
YOUR PRINCIPLE
INTEREST?
WHAT’S
YOUR
How do statement users determine the impact of interest capitalization
on a company’s bottom line? They examine the notes to the financial
statements. Companies with material interest capitalization must
disclose the amounts of capitalized interest relative to total interest
costs. For example, Royal Dutch Shell (GBR and NLD) capitalized
nearly 42 percent of its total interest costs in a recent year and provided
the following footnote related to capitalized interest.
10-37
LO 4
10
Acquisition and Disposition of
Property, Plant, and
Equipment
LEARNING OBJECTIVES
After studying this chapter, you should be able to:
1. Describe property, plant, and
equipment.
2. Identify the costs to include in initial
valuation of property, plant, and
equipment.
3. Describe the accounting problems
associated with self-constructed assets.
4. Describe the accounting problems
associated with interest capitalization.
10-38
5. Understand accounting issues
related to acquiring and valuing
plant assets.
6. Describe the accounting treatment for
costs subsequent to acquisition.
7. Describe the accounting treatment for
the disposal of property, plant, and
equipment.
VALUATION OF PROPERTY, PLANT &
EQUIPMENT
Companies should record property, plant, and equipment:

at the fair value of what they give up or

at the fair value of the asset received,
whichever is more clearly evident.
10-39
LO 5
VALUATION OF PP&E
Cash Discounts — Discounts for prompt payment.
Deferred-Payment Contracts — Assets purchased on
long-term credit contracts are valued at the present value of the
consideration exchanged.
Lump-Sum Purchases — Allocate the total cost among the
various assets on the basis of their relative fair market values.
Issuance of Shares — The market price of the shares
issued is a fair indication of the cost of the property acquired.
10-40
LO 5
VALUATION OF PP&E
Exchanges of Non-Monetary Assets
Ordinarily accounted for on the basis of:

the fair value of the asset given up or

the fair value of the asset received,
whichever is clearly more evident.
Companies should recognize immediately any gains or losses on
the exchange when the transaction has commercial substance.
10-41
LO 5
Exchanges of Non-Monetary Assets
Meaning of Commercial Substance
Exchange has commercial substance if the future cash flows
change as a result of the transaction. That is, if the two parties’
economic positions change, the transaction has commercial
substance.
ILLUSTRATION 10-10
Accounting for Exchanges
10-42
LO 5
Exchanges of Non-Monetary Assets
Exchanges—Loss Situation
Companies recognize a loss immediately whether the exchange
has commercial substance or not.
Rationale: Companies should not value assets at more than their
cash equivalent price; if the loss were deferred, assets would be
overstated.
10-43
LO 5
Exchanges of Non-Monetary Assets
Illustration: Information Processing, Inc. trades its used machine for a
new model at Jerrod Business Solutions Inc. The exchange has
commercial substance. The used machine has a book value of €8,000
(original cost €12,000 less €4,000 accumulated depreciation) and a fair
value of €6,000. The new model lists for €16,000. Jerrod gives
Information Processing a trade-in allowance of €9,000 for the used
machine. Information Processing computes the cost of the new asset
as follows.
ILLUSTRATION 10-11
Computation of Cost of
New Machine
10-44
LO 5
Exchanges of Non-Monetary Assets
Illustration: Information Processing records this transaction as follows:
Equipment
Accumulated Depreciation—Equipment
4,000
Loss on Disposal of Equipment
2,000
Equipment
Cash
Loss on
Disposal
10-45
13,000
12,000
7,000
ILLUSTRATION 10-12
Computation of Loss
on Disposal of Used
Machine
LO 5
Exchanges of Non-Monetary Assets
Exchanges—Gain Situation
Has Commercial Substance. Company usually records the
cost of a non-monetary asset acquired in exchange for
another non-monetary asset at the fair value of the asset
given up, and immediately recognizes a gain.
10-46
LO 5
Exchanges of Non-Monetary Assets
Illustration: Interstate Transportation Company exchanged a
number of used trucks plus cash for a semi-truck. The used trucks
have a combined book value of $42,000 (cost $64,000 less $22,000
accumulated depreciation). Interstate’s purchasing agent,
experienced in the secondhand market, indicates that the used
trucks have a fair market value of $49,000. In addition to the trucks,
Interstate must pay $11,000 cash for the semi-truck. Interstate
computes the cost of the semi-truck as follows.
Illustration 10-13
Computation of
Semi-Truck Cost
10-47
LO 5
Exchanges of Non-Monetary Assets
Illustration: Interstate records the exchange transaction as follows:
Truck (semi)
60,000
Accumulated Depreciation—Trucks
22,000
Trucks (used)
Gain on Disposal of Trucks
Cash
Gain on
Disposal
10-48
64,000
7,000
11,000
ILLUSTRATION 10-14
Computation of Gain
on Disposal of Used
Trucks
LO 5
Exchanges of Non-Monetary Assets
Exchanges—Gain Situation
Lacks Commercial Substance. Now assume that Interstate
Transportation Company exchange lacks commercial
substance.
Interstate defers the gain of $7,000 and reduces the basis of
the semi-truck.
10-49
LO 5
Exchanges of Non-Monetary Assets
Illustration: Interstate records the exchange transaction as
follows:
Trucks (semi)
53,000
Accumulated Depreciation—Trucks
22,000
Trucks (used)
64,000
Cash
11,000
ILLUSTRATION 10-15
Basis of Semi-Truck—
Fair Value vs. Book Value
10-50
LO 5
Exchanges of Non-Monetary Assets
Summary of Gain and Loss Recognition on
Exchanges of Non-Monetary Assets
ILLUSTRATION 10-16
Disclosure include
10-51

nature of the transaction(s),

method of accounting for the assets exchanged, and

gains or losses recognized on the exchanges.
LO 5
VALUATION OF PP&E
Government Grants
Government Grants are assistance received from a
government in the form of transfers of resources to a
company in return for past or future compliance with certain
conditions relating to the operating activities of the
company.
IFRS requires grants to be recognized in income (income
approach) on a systematic basis that matches them with the
related costs that they are intended to compensate.
10-52
LO 5
Government Grants
Example 1: Grant for Lab Equipment. AG Company received a
€500,000 subsidy from the government to purchase lab
equipment on January 2, 2015. The lab equipment cost is
€2,000,000, has a useful life of five years, and is depreciated on
the straight-line basis.
IFRS allows AG to record this grant in one of two ways:
1. Credit Deferred Grant Revenue for the subsidy and amortize
the deferred grant revenue over the five-year period.
2. Credit the lab equipment for the subsidy and depreciate this
amount over the five-year period.
10-53
LO 5
Government Grants
Example 1: Grant for Lab Equipment. If AG chooses to record
deferred revenue of €500,000, it amortizes this amount over the
five-year period to income (€100,000 per year). The effects on the
financial statements at December 31, 2015, are:
ILLUSTRATION 10-17
Government Grant
Recorded as Deferred
Revenue
10-54
LO 5
Government Grants
Example 1: Grant for Lab Equipment. If AG chooses to reduce
the cost of the lab equipment, AG reports the equipment at
€1,500,000 (€2,000,000 - €500,000) and depreciates this amount
over the five-year period. The effects on the financial statements
at December 31, 2015, are:
10-55
ILLUSTRATION 10-18
Government Grant Adjusted to Asset
LO 5
10
Acquisition and Disposition of
Property, Plant, and
Equipment
LEARNING OBJECTIVES
After studying this chapter, you should be able to:
1. Describe property, plant, and
equipment.
5. Understand accounting issues related
to acquiring and valuing plant assets.
2. Identify the costs to include in initial
valuation of property, plant, and
equipment.
6. Describe the accounting treatment
for costs subsequent to acquisition.
3. Describe the accounting problems
associated with self-constructed assets.
4. Describe the accounting problems
associated with interest capitalization.
10-56
7. Describe the accounting treatment for
the disposal of property, plant, and
equipment.
COSTS SUBSEQUENT TO ACQUISITION
Recognize costs subsequent to acquisition as an asset when
the costs can be measured reliably and it is probable that the
company will obtain future economic benefits.
Evidence of future economic benefit would include increases in
1. useful life,
2. quantity of product produced, and
3. quality of product produced.
10-57
LO 6
COSTS SUBSEQUENT TO ACQUISITION
10-58
ILLUSTRATION 10-21 Summary of Costs Subsequent to Acquisition
LO 6
10
Acquisition and Disposition of
Property, Plant, and
Equipment
LEARNING OBJECTIVES
After studying this chapter, you should be able to:
1. Describe property, plant, and
equipment.
5. Understand accounting issues related
to acquiring and valuing plant assets.
2. Identify the costs to include in initial
valuation of property, plant, and
equipment.
6. Describe the accounting treatment for
costs subsequent to acquisition.
3. Describe the accounting problems
associated with self-constructed assets.
4. Describe the accounting problems
associated with interest capitalization.
10-59
7. Describe the accounting treatment
for the disposal of property, plant,
and equipment.
DISPOSITION OF PROPERTY, PLANT,
AND EQUIPMENT
A company may retire plant assets voluntarily or dispose of
them by

Sale,

Exchange,

Involuntary conversion, or

Abandonment.
Depreciation must be taken up to the date of disposition.
10-60
LO 7
DISPOSITION OF PP&E
Sale of Plant Assets
Illustration: Barret Company recorded depreciation on a machine
costing €18,000 for nine years at the rate of €1,200 per year. If it
sells the machine in the middle of the tenth year for €7,000, Barret
records depreciation to the date of sale as:
Depreciation Expense (€1,200 x ½)
Accumulated Depreciation—Machinery
10-61
600
600
LO 7
DISPOSITION OF PP&E
Illustration: Barret Company recorded depreciation on a machine
costing $18,000 for 9 years at the rate of $1,200 per year. If it sells
the machine in the middle of the tenth year for $7,000, Barret
records depreciation to the date of sale. Record the entry to record
the sale of the asset:
Cash
Accumulated Depreciation—Machinery
Machinery
Gain on Disposal of Machinery
10-62
7,000
11,400
18,000
400
LO 7
DISPOSITION OF PP&E
Involuntary Conversion
Sometimes an asset’s service is terminated through some type of
involuntary conversion such as fire, flood, theft, or condemnation.
Companies report the difference between the amount recovered
(e.g., from a condemnation award or insurance recovery), if any,
and the asset’s book value as a gain or loss.
They treat these gains or losses like any other type of disposition.
10-63
LO 7
DISPOSITION OF PP&E
Illustration: Camel Transport Corp. had to sell a plant located on
company property that stood directly in the path of an interstate
highway. Camel received $500,000, which substantially exceeded
the book value of the land of $150,000 and the book value of the
building of $100,000 (cost of $300,000 less accumulated depreciation
of $200,000). Camel made the following entry.
10-64
Cash
500,000
Accumulated Depreciation—Buildings
200,000
Buildings
300,000
Land
150,000
Gain on Disposal of Plant Assets
250,000
LO 7
COPYRIGHT
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10-65